Practice exercises
1. Suppose you purchased 5 apples and 3 oranges last week. Apples cost $0.75 per apple, and oranges were $1.00 per orange. How much did you spend on fruit? (Assume the only fruit you purchased was apples and oranges).
2. This week you increased your purchases to 6 apples and 5 oranges, but the price remained the same. How much money did you spend this week on fruit? Did your increase in spending seem to ‘match' your increase in consumption?
3. Suppose this week the prices of apples and oranges doubled instead of remaining the same (as in question 2). How much money would you have spent on fruit if you still purchased 6 apples and 5 oranges? Did your increase in spending seem to ‘match' your increase in consumption?
4. How do your answers to questions 1-3 relate to the calculation of real and nominal GDP? Think about what your answers from 2+3 indicate about the importance of the price when calculating GDP. That is, if you want GDP (or your expenditures on fruit) to accurately measure the increase in output (your fruit consumption), what should you use for the prices you use to calculate GDP (your expenditures on fruit)?
5. Pick two items from your immediate surroundings (that is, don't worry about the particular object you use) and apply the definition of GDP to determine whether either or both of those items contributed to the GDP of the United States this year. You may have to make assumptions, and if so, just briefly state them.